<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
COMMISSION FILE NUMBER 0-26542
---------------------------
REDHOOK ALE BREWERY, INCORPORATED
(Exact name of registrant as specified in its charter)
WASHINGTON 91-1141254
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3400 PHINNEY AVENUE NORTH, SEATTLE, WASHINGTON 98103-8624
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (206) 548-8000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Common stock, par value $.005 per share: 7,686,686 shares outstanding
as of June 30, 1997.
Page 1 of 14 sequentially numbered pages
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<PAGE> 2
REDHOOK ALE BREWERY, INCORPORATED
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Balance Sheets
June 30, 1997 and December 31, 1996..................... 3
Statements of Income
Three Months Ended June 30, 1997 and 1996
and Six Months Ended June 30, 1997 and 1996............. 4
Condensed Statements of Cash Flows
Six Months Ended June 30, 1997 and 1996................. 5
Notes to Financial Statements.................................... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 7
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders.................. 12
ITEM 6. Exhibits and Reports on Form 8-K..................................... 13
</TABLE>
2
<PAGE> 3
PART I.
ITEM 1. FINANCIAL STATEMENTS
REDHOOK ALE BREWERY, INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents ........................................ $ 2,048,230 $ 1,162,352
Accounts Receivable .............................................. 1,994,349 2,051,591
Inventories ...................................................... 2,579,868 2,229,376
Income Taxes Receivable .......................................... 513,445 427,075
Other ............................................................ 589,591 1,725,942
----------- -----------
Total Current Assets ........................................... 7,725,483 7,596,336
Fixed Assets, Net .................................................. 89,154,881 86,357,559
Other Assets ....................................................... 1,102,534 1,170,144
----------- -----------
Total Assets ................................................. $97,982,898 $95,124,039
=========== ===========
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND COMMON STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable ................................................. $ 2,773,768 $ 4,075,699
Accrued Salaries, Wages, and Payroll Taxes ....................... 1,164,696 1,220,212
Refundable Deposits .............................................. 1,095,439 950,926
Other Accrued Expenses ........................................... 371,162 367,025
Current Portion of Long-Term Debt ................................ 587,094 132,554
----------- -----------
Total Current Liabilities ...................................... 5,992,159 6,746,416
----------- -----------
Long-Term Debt, Net of Current Portion ............................. 10,170,874 6,190,764
----------- -----------
Deferred Income Taxes .............................................. 3,638,896 3,582,692
----------- -----------
Other Liabilities .................................................. 46,070 52,461
----------- -----------
Convertible Redeemable Preferred Stock ............................. 15,944,055 15,921,855
----------- -----------
Common Stockholders' Equity:
Common Stock, Par Value $0.005 per Share, Authorized, 50,000,000
Shares; Issued and Outstanding, 7,686,686 Shares in 1997 and
7,685,486 Shares in 1996........................................ 38,434 38,428
Additional Paid-In Capital ....................................... 56,652,973 56,652,764
Retained Earnings ................................................ 5,499,437 5,938,659
----------- -----------
Total Common Stockholders' Equity ............................ 62,190,844 62,629,851
----------- -----------
Total Liabilities, Preferred Stock and
Common Stockholders' Equity .............................. $97,982,898 $95,124,039
=========== ===========
</TABLE>
See Accompanying Notes
3
<PAGE> 4
REDHOOK ALE BREWERY, INCORPORATED
STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -----------------------------
1997 1996 1997 1996
---------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Sales ...................................... $9,976,073 $10,302,381 $ 18,844,283 $18,857,226
Less Excise Taxes .......................... 974,584 992,077 1,848,940 1,825,816
---------- ----------- ------------ -----------
Net Sales .................................. 9,001,489 9,310,304 16,995,343 17,031,410
Cost of Sales .............................. 6,354,498 5,797,721 12,726,380 10,852,782
---------- ----------- ------------ -----------
Gross Profit ............................... 2,646,991 3,512,583 4,268,963 6,178,628
Selling, General and Administrative
Expenses ................................. 2,518,020 1,862,108 4,939,162 3,394,274
---------- ----------- ------------ -----------
Operating Income (Loss) .................... 128,971 1,650,475 (670,199) 2,784,354
Interest Expense ........................... 5,782 -- 5,782 --
Other Income - Net ......................... 19,234 188,490 37,545 445,996
---------- ----------- ------------ -----------
Income (Loss) before Income Taxes ......... 142,423 1,838,965 (638,436) 3,230,350
Provision (Benefit) for Income Taxes ....... 71,408 671,223 (221,414) 1,179,078
---------- ----------- ------------ -----------
Net Income (Loss) .......................... $ 71,015 $ 1,167,742 $ (417,022) $ 2,051,272
========== =========== ============ ===========
Net Income (Loss) per Share ................ $ 0.01 $ 0.13 $ (0.05) $ 0.22
========== =========== ============ ===========
Weighted Average Common and Common
Equivalent Shares Outstanding ............ 9,010,991 9,158,239 7,686,019 9,159,485
========== =========== ============ ===========
</TABLE>
See Accompanying Notes
4
<PAGE> 5
REDHOOK ALE BREWERY, INCORPORATED
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------
1997 1996
----------- ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income (Loss) .................................... $ (417,022) $ 2,051,272
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by Operating Activities:
Depreciation and Amortization .................... 1,614,071 858,275
Deferred Income Tax Provision .................... 56,204 563,814
Net Change in Operating Assets and Liabilities ... (50,353) (918,793)
----------- ------------
Net Cash Provided by Operating Activities ............ 1,202,900 2,554,568
----------- ------------
INVESTING ACTIVITIES
Expenditures for Fixed Assets ........................ (4,724,609) (19,339,488)
Other ................................................ (27,278) (13,461)
----------- ------------
Net Cash Used in Investing Activities ................ (4,751,887) (19,352,949)
----------- ------------
FINANCING ACTIVITIES
Proceeds from Debt ................................... 5,350,000 11,500,000
Repayments on Debt .................................. (915,350) (11,560,805)
Other ................................................ 215 13,875
----------- ------------
Net Cash Provided by (Used in) Financing Activities .. 4,434,865 (46,930)
----------- ------------
Increase (Decrease) in Cash and Cash Equivalents ..... 885,878 (16,845,311)
Cash and Cash Equivalents:
Beginning of Year .................................. 1,162,352 24,676,600
----------- ------------
End of Period ...................................... $ 2,048,230 $ 7,831,289
=========== ============
</TABLE>
See Accompanying Notes
5
<PAGE> 6
1. BASIS OF PRESENTATION
The accompanying financial statements and related notes should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K. The accompanying financial statements
include the accounts of Redhook Ale Brewery, Incorporated (the "Company") and
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. These financial statements are unaudited, condensed and do
not contain all of the information required by generally accepted accounting
principles to be included in a full set of financial statements. In the opinion
of management, all material adjustments necessary to present fairly the
financial position, results of operations and cash flows of the Company, for the
periods presented, have been made. All such adjustments were of a normal,
recurring nature. The results of operations for such interim periods are not
necessarily indicative of the results of operations for the full year.
2. EARNINGS PER SHARE
Earnings per share is based on the weighted average common and common
equivalent shares outstanding during the respective periods. The calculation of
average common equivalent shares outstanding includes the effect of all
outstanding convertible redeemable preferred stock and outstanding stock options
for the quarters ended June 30, 1997 and 1996 and the six-month period ended
June 30, 1996. The convertible preferred stock and outstanding stock options
have been excluded from the calculation for the six-month period ended June 30,
1997 because their effect is anti-dilutive. The calculation uses the treasury
stock method in determining the resulting incremental common equivalent shares
outstanding.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
---------- ----------
<S> <C> <C>
Finished goods ......................... $1,377,972 $1,264,480
Raw materials .......................... 515,618 282,603
Promotional merchandise................. 393,469 511,089
Packaging materials .................... 292,809 171,204
---------- ----------
$2,579,868 $2,229,376
========== ==========
</TABLE>
Finished goods include beer held in fermentation prior to the filtration and
packaging process.
6
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's Financial Statements and Notes thereto included herein.
OVERVIEW
Since its formation, the Company has focused its business activities on the
brewing, marketing and selling of craft beers. For the six months ended June 30,
1997, the Company had gross sales of $18,844,000 compared to $18,857,000 in the
comparable period of 1996. The Company believes that period-to-period
comparisons of its financial results should not be relied upon as an accurate
indicator of future performance. The Company's sales consist predominantly of
sales of beer to third-party distributors and Anheuser-Busch, Inc. ("A-B")
through the Distribution Alliance. In addition, the Company derives other
revenues from the sale of beer, food, apparel and other retail items in its
brewery pubs. The Company is required to pay federal excise taxes on sales of
its beer. The excise tax burden on beer sales increases from $7 to $18 per
barrel on annual production over 60,000 barrels and thus, if sales volumes
increase, federal excise taxes would increase as a percentage of sales.
The Company's sales growth slowed significantly in late 1996 and that trend
has continued into 1997. In addition to the level of consumer demand in existing
markets, the Company's sales are also affected by other factors such as the
opening of new distribution territories, new product introductions and
competitive considerations, including the increasing number of craft brewers and
promotional pricing. Sales in the craft beer industry generally reflect a degree
of seasonality, with the first quarter historically being the weakest and the
second half of the year typically demonstrating stronger sales in connection
with summer activities and fall and early winter holidays. The Company has
historically operated with little or no backlog, and its ability to predict
sales for future periods is limited.
Under normal circumstances, the Company generally operates its brewing
facilities up to five days per week, two shifts per day. To meet the demand for
its products, the Company increased its annual production capacity, from
approximately 3,000 barrels at its first brewery in the Ballard neighborhood of
Seattle in 1982 to approximately 425,000 barrels as of June 30, 1997. Production
capacity of each facility is added in phases until the facility reaches its
maximum designed production capacity. The timing of each phase is affected by
the availability of capital, construction constraints and the Company's plans
for an orderly entry into selected new markets and growth in existing markets.
The Portsmouth, New Hampshire Brewery began commercial production during October
1996. The Portsmouth Brewery's initial production capacity is approximately
100,000 barrels per year and its maximum designed production capacity is
approximately 250,000 barrels per year. Additional capital expenditures and
production personnel will be required to bring the Portsmouth Brewery to its
maximum designed capacity.
Upon the opening of the Portsmouth Brewery, the Company's maximum designed
production capacity increased from 325,000 barrels per year to 575,000 barrels
per year, resulting in a significant decline in the capacity utilization rate.
The Company's capacity utilization has a significant impact on its gross profit.
When facilities are operating at their maximum designed production capacity,
profitability is favorably affected by spreading fixed and semivariable
operating costs, such as depreciation and production salaries, over a larger
sales base. Most capital costs associated with building a new brewery and fixed
and semivariable costs related to operating a new brewery are incurred prior to,
or upon commencement of, production at a facility. Because the initial
production level is substantially below the facility's maximum designed
production capacity, gross margins are negatively impacted. This impact is
reduced as the facility's actual production increases.
In addition to capacity utilization, the Company expects other factors to
influence profit margins, including higher costs associated with the opening of
new distribution territories, such as increased shipping, marketing and sales
personnel costs; fees related to the distribution agreement with A-B; changes in
packaging and other material costs; and changes in product sales mix. The
incremental cost of shipping beer from the Company's breweries will increase as
the volume of beer supplied to more distant markets increases. The commencement
of production at the Portsmouth Brewery has reduced shipping expenses to eastern
U.S. markets.
7
<PAGE> 8
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Certain Considerations: Issues and Uncertainties."
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
from the Company's Statements of Income expressed as a percentage of net sales.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------- -----------------
1997 1996 1997 1996
------ ----- ----- -------
<S> <C> <C> <C> <C>
Sales ...................................... 110.8% 110.7.% 110.9% 110.7%
Less Excise Taxes .......................... 10.8 10.7 10.9 10.7
----- ----- ----- -------
Net Sales .................................. 100.0 100.0 100.0 100.0
Cost of Sales .............................. 70.6 62.3 74.9 63.7
----- ----- ----- -------
Gross Profit ............................... 29.4 37.7 25.1 36.3
Selling, General and Administrative
Expenses ................................. 28.0 20.0 29.1 19.9
----- ----- ----- -------
Operating Income (Loss) .................... 1.4 17.7 (4.0) 16.4
Other Income - Net ......................... 0.2 2.0 0.2 2.6
----- ----- ----- -------
Income (Loss) Before Income Taxes .......... 1.6 19.7 (3.8) 19.0
Provision (Benefit) for Income Taxes ....... 0.8 7.2 (1.3) 7.0
----- ----- ----- -------
Net Income (Loss) .......................... 0.8% 12.5% (2.5)% 12.0%
===== ===== ===== =======
</TABLE>
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996
Sales. Total sales decreased by 3.2% to $9,976,000 in the second quarter of
1997 from $10,302,000 in the comparable 1996 period, primarily due to a 4.9%
decrease in total sales volumes to 56,400 barrels from 59,300 barrels, that was
partially offset by an increase in other sales. At June 30, 1997, the Company
was selling beer in 47 states compared to 44 states at June 30, 1996. The total
second quarter sales volume decline included a 4.8% decrease in West Coast
sales. Washington state, the Company's largest market, declined 3.5% in the
second quarter of 1997 compared to the second quarter of 1996. The competitive
landscape has been affected by the continued increase in the number of craft
beer companies and the number of different products they offer. The Company's
other sales totaled $882,000 for the second quarter of 1997, compared to
$803,000 for the same period in 1996.
Excise Taxes. Excise taxes decreased to $975,000, or 10.8% of net sales in
the second quarter of 1997, from $992,000, or 10.7% of net sales in the
comparable quarter of 1996, reflecting decreased sales volumes.
Cost of Sales. Cost of sales increased to $6,354,000 in the second quarter
of 1997 from $5,798,000 in the comparable quarter of 1996, primarily due to the
impact of the operating costs related to the new brewery in Portsmouth, New
Hampshire, that was partially offset by the effects of decreases in sales
volume, freight expense and packaging costs. Cost of sales, as a percentage of
net sales, increased to 70.6% in the second quarter of 1997 compared to 62.3% in
the comparable period of 1996, primarily due to an increase in the fixed and
semi-variable costs associated with operating the new brewery, partially offset
by freight savings on shipments to eastern markets and a decrease in packaging
costs. The utilization rate of the breweries' maximum designed capacity was 39%
and 73% in the three months ended June 30, 1997 and 1996, respectively. The
utilization rate decreased in the 1997 period due to the increase in capacity
associated with the commissioning of the Portsmouth Brewery during the fourth
quarter of 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $2,518,000 in the second quarter of 1997
from $1,862,000 in the comparable quarter of 1996. The increase is
8
<PAGE> 9
primarily related to the Company's expansion into new markets in new states and
within states previously served. These expenses increased as a percentage of net
sales to 28.0% in 1997 from 20.0% in 1996, primarily attributable to additional
sales personnel and related expenses in new markets, and increased promotional
and marketing expenses in the Company's existing markets that are increasingly
competitive.
Interest Expense. Interest expense totaled $6,000 in the second quarter of
1997. There was no interest expense in the comparable quarter of 1996 as all
interest incurred was capitalized as part of brewery construction costs.
Substantially all construction-in-progress was placed in service as of July 1,
1997, therefore, the Company's interest expense will increase significantly for
periods after that date.
Other Income - Net. Other income - net, decreased to $19,000 in the second
quarter of 1997 compared to $188,000 in the comparable quarter of 1996. The
decrease is due primarily to a decline in income from short-term investments as
available funds were invested in the Portsmouth and Woodinville breweries.
Income Taxes. The Company's effective income tax rate increased to 50% in
the second quarter of 1997 from 36.5% in the second quarter of 1996. The
increase is the result of lower pretax income relative to other components of
the tax provision calculation, such as the meals and entertainment exclusion,
and the Company's expansion into new states and the corresponding expected
increase in state income taxes.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Sales. Total sales were substantially unchanged at $18,844,000 for the
first six months of 1997 compared to $18,857,000 for the comparable 1996 period,
as a 1.1% decrease in total sales volumes was substantially offset by an
increase in other sales. Although total sales volumes for the six months ended
June 30, 1997 decreased to 107,800 barrels from 109,000 barrels in the
comparable 1996 period, West Coast sales decreased approximately 5.3% for the
same period, including a 5.2% decline in Washington state, the Company's largest
market. The competitive landscape has been affected by the continued increase in
the number of craft beer companies and the number of different products they
offer. The Company's other sales totaled $1,510,000 in the first six months of
1997, compared to $1,393,000 for the same period in 1996.
Excise Taxes. Excise taxes were substantially unchanged at $1,849,000, or
10.9% of net sales in the first six months of 1997, compared to $1,826,000, or
10.7% of net sales in the comparable period of 1996.
Cost of Sales. Cost of sales increased to $12,726,000 in the first six
months of 1997 from $10,853,000 in the comparable period of 1996, primarily due
to the impact of the operating costs related to the new brewery in Portsmouth,
New Hampshire that was partially offset by the effects of decreases in sales
volume, freight expense and packaging costs. Cost of sales, as a percentage of
net sales, increased to 74.9% in the first six months of 1997 compared to 63.7%
in comparable 1996 period, primarily due to an increase in fixed and
semi-variable costs associated with operating the new brewery, partially offset
by freight savings on shipments to eastern markets and a decrease in packaging
costs. The utilization rate of the breweries' maximum designed capacity was 38%
and 67% in the six months ended June 30, 1997 and 1996, respectively. The
utilization rate decreased in the 1997 period due to the increase in capacity
associated with the commissioning of the Portsmouth Brewery.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $4,939,000 in the first six months of 1997
from $3,394,000 in the comparable 1996 period. The increase is primarily related
to the Company's expansion into new markets in new states and within states
previously served. These expenses increased as a percentage of net sales to
29.1% in 1997 from 19.9% in 1996, primarily attributable to additional sales
personnel and related expenses in new markets, and increased promotional and
marketing expenses in the Company's existing markets that are increasingly
competitive.
Other Income - Net. Other income - net, decreased to $38,000 in first six
months of 1997 compared to $446,000 in the comparable 1996 period. The decrease
is due primarily to a decline in income from short-term investments as available
funds were invested in the Portsmouth and Woodinville breweries.
9
<PAGE> 10
LIQUIDITY AND CAPITAL RESOURCES
The Company had $2,048,000 and $1,162,000 of cash and cash equivalents at
June 30, 1997 and December 31, 1996, respectively. At June 30, 1997, the Company
had working capital of $1,733,000. The Company's long-term debt as a percentage
of total capitalization (long-term debt, preferred stock and common
stockholders' equity) was 12.1% and 7.5% as of June 30, 1997, and December 31,
1996, respectively.
On June 5, 1997, the Company elected to convert the $9 million outstanding
balance of its secured bank facility (the "Secured Facility") to a five-year
term loan with a 20-year amortization schedule. As of June 30, 1997, there was
$9 million outstanding on the Secured Facility and the Company's one-month
IBOR-based borrowing rate was approximately 7.25%. In addition, the Company has
a $10 million unsecured revolving credit facility with the same bank through
June 5, 1998, and as of June 30, 1997, there were no borrowings outstanding on
this facility. Interest accrues at a variable rate based on the Inter Bank
Offered Rate ("IBOR"), plus 1.25% to 2.75% for the Secured Facility, and plus
1.00% to 2.50% on the unsecured facility, depending on the Company's
debt-to-tangible net worth ratio. The Company can fix the rate by selecting IBOR
for one- to twelve-month periods as a base.
The Company requires capital principally for the construction and
development of its technologically advanced production facilities. To date, the
Company has financed its capital requirements through cash flow from operations,
bank borrowings and the sale of common and preferred stock.
Capital expenditures for the six months ended June 30, 1997 totaled $4.7
million. The capital expenditures related primarily to the kegging and cold
storage facility under construction at the Woodinville Brewery. Capital
expenditures for 1997 are expected to total approximately $5 million.
The Company expects to meet its future financing needs, including working
capital and capital expenditure requirements, through cash on hand, operating
cash flow and, to the extent required and available, bank borrowings and
offerings of debt or equity securities.
The Company has certain commitments, contingencies and uncertainties
relating to its normal operations. Management believes that any such
commitments, contingencies or uncertainties, including any environmental
uncertainties, will not have a material adverse effect on the Company's
financial position or results of operations.
CERTAIN CONSIDERATIONS: ISSUES AND UNCERTAINTIES
The Company does not provide forecasts of future financial performance or
sales volumes, but this Quarterly Report does contain certain other types of
forward-looking statements that involve risks and uncertainties. The Company
may, in discussions of its future plans, objectives and expected performance in
periodic reports filed by the Company with the Securities and Exchange
Commission (or documents incorporated by reference therein) and in written and
oral presentations made by the Company, include forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, or
Section 21E of the Securities Exchange Act of 1934, as amended. Such
forward-looking statements are based on assumptions which the Company believes
are reasonable, but are by their nature inherently uncertain. In all cases,
there can be no assurance that such assumptions will prove correct or that
projected events will occur. Actual results could differ materially from those
projected depending on a variety of factors, including, but not limited to, the
issues discussed below, the successful execution of expansion and other plans
and the availability of financing. While Company management is optimistic about
the Company's long-term prospects, the following issues and uncertainties, among
others, should be considered in evaluating its growth outlook and any
forward-looking statements.
Effect of Competition on Future Growth. The domestic market in which the
Company's craft beers are sold is highly competitive due to the continuing
proliferation of small craft brewers, including contract brewers, the increase
in the number of products offered by such brewers and the introduction of
fuller-flavored products by major national brewers. The Company's revenue growth
rate began to slow in late 1996, due primarily to slower than expected sales in
its highly competitive West Coast markets. If the West Coast sales trends were
to continue or
10
<PAGE> 11
growth in other markets were to slow, the Company's future sales could be
materially adversely affected. The Company has historically operated with little
or no backlog and, therefore, its ability to predict sales for future periods is
limited.
Sales Prices. Future prices the Company charges for its products may
decrease from historical levels, depending on competitive factors in the
Company's various markets. In certain markets, the Company has participated in
price promotions with its wholesalers and their retail customers. The number of
markets in which the Company participates in price promotions and the frequency
of such promotions is expected to increase in the future.
Variability of Gross Margin and Cost of Sales. The Company anticipates that
its future gross margins will fluctuate and may decline as a result of many
factors, including disproportionate depreciation and other fixed and
semivariable operating costs, during periods when the Company's breweries are
producing below maximum designed production capacity. The Company's high level
of fixed and semivariable operating costs causes gross margin to be very
sensitive to relatively small increases or decreases in sales volume. In
addition, other factors that could affect cost of sales include changes in:
shipping costs, availability and prices of raw materials and packaging
materials, mix between draft and bottled product sales, and Federal or state
excise taxes. Also, as sales volumes through the Company's Distribution Alliance
with Anheuser-Busch, Incorporated ("A-B") increase, the alliance fee, and other
staging and administrative costs, will increase.
Advertising and Promotional Costs. While the Company has historically done
very limited advertising, market and competitive considerations could make a
significant increase in such spending appropriate. In addition, market and
competitive considerations could require a significant increase in other
promotional costs associated with developing existing and new markets.
Relationship with A-B. Most of the Company's future sales are expected to
be through the Distribution Alliance with A-B. If the Distribution Alliance were
to be terminated, or if the relationship between A-B and the Company were to
deteriorate, the Company's sales growth and profitability could be materially
adversely affected. While the Company believes that the benefits of the
Distribution Alliance, in particular increased sales volume, access to
distributors and distribution efficiencies, offset related costs associated with
the Alliance, there can be no assurance that these costs will not have a
negative impact on the Company's profit margins in the future.
Dependence on Third-Party Distributors. The Company relies heavily on
third-party distributors for the sale of its products to retailers. The
Company's most significant non-Alliance wholesaler, K&L Distributors, Inc., an
A-B affiliated wholesaler in the Seattle area, accounted for approximately 18%
of the Company's sales during 1996. Substantially all of the remaining sales
volumes are now through the Distribution Alliance to A-B affiliated
distributors, most of whom are independent wholesalers. The loss of K&L or the
termination of the Distribution Alliance could have a material adverse impact on
the Company's sales and profitability.
Customer Acceptance, Consumer Trends and Public Attitudes. If consumers
were unwilling to accept the Company's products or if the recent trends toward
drinking craft beers were to change, it could adversely impact the Company's
sales and profitability. The alcoholic beverage industry has become the
subject of considerable societal and political attention in recent years due to
increasing public concern over alcohol-related social problems, including drunk
driving, underage drinking and health consequences from the misuse of alcohol.
If beer consumption in general were to come into disfavor among domestic
consumers, or if the domestic beer industry were subjected to significant
additional governmental regulation, the Company's sales and profitability
could be adversely affected.
11
<PAGE> 12
NEW ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share ("SFAS 128"), which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
interim and annual periods. Under the new requirements for calculating "basic"
(primary) earnings per share, the dilutive effect of common stock equivalents
such as outstanding convertible preferred stock and stock options will be
excluded from the calculation. The impact of SFAS 128 on previously reported
earnings per share for the three and six months ended June 30, 1997 and 1996
will not be material. There will be no effect on the net loss per share for the
six months ended June 30, 1997, because the effect of common stock equivalents
is antidilutive and, therefore, is excluded from the calculation. The impact of
Statement 128 on the calculation of "diluted" (fully diluted) earnings per share
for these quarters is not expected to be material.
PART II. - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Shareholders was held on May 21, 1997. The
following matters were voted upon by the shareholders with the results as
follows:
(1) The following persons were nominated by the Board of Directors and
each was elected to serve as a director until the next Annual Meeting of
Shareholders or until his earlier retirement, resignation or removal:
Paul S. Shipman, Gordon A. Bowker, John T. Carleton, Frank H. Clement,
Jerry D. Jones, William H. McNulty, Bruce M. Sandison, Walter F. Walker
and Dennis P. Weston.
The number of votes cast for or withheld for each director nominee
was as follows:
<TABLE>
<CAPTION>
NOMINEE FOR WITHHELD
------- --- --------
<S> <C> <C>
Paul S. Shipman 8,271,280 138,869
Gordon A. Bowker 8,271,520 138,629
John T. Carleton 8,270,355 139,794
Frank H. Clement 8,270,402 139,747
Jerry D. Jones 8,267,872 142,277
William H. McNulty 8,269,545 140,604
Bruce M. Sandison 8,270,805 139,344
Walter F. Walker 8,265,279 144,870
Dennis P. Weston 8,267,772 142,377
</TABLE>
(2) The shareholders voted 8,369,089 shares in the affirmative, 28,287
shares in the negative and 12,773 shares abstained to ratify the
appointment of Ernst & Young LLP, as independent auditors for the
Company's year ending December 31, 1997.
12
<PAGE> 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
The following exhibits are filed as part of this report.
11.1 Computation of Earnings Per Share
27 Financial Data Schedule
(B) REPORTS ON FORM 8-K
None filed during the quarter ended June 30, 1997.
ITEMS 1, 2, 3 AND 5 OF PART II ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
13
<PAGE> 14
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Seattle,
State of Washington, on August 7, 1997.
REDHOOK ALE BREWERY, INCORPORATED
BY: /s/ Bradley A. Berg
------------------------------
Bradley A. Berg
Executive Vice President and
Chief Financial Officer
BY: /s/ David H. Kirske
-------------------------------
David H. Kirske
Controller and Treasurer,
Principal Accounting Officer
DATE: August 7, 1997
14
<PAGE> 1
REDHOOK ALE BREWERY, INCORPORATED
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1997 1996 1997 1996
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Primary and fully-diluted earnings per common share:
Weighted average common shares outstanding ........... 7,686,440 7,641,364 7,686,019 7,639,768
Weighted average common equivalent shares outstanding:
Series A convertible redeemable preferred stock .... -- -- -- --
Series B convertible redeemable preferred stock .... 1,289,872 1,289,872 -- 1,289,872
Stock options, net ................................. 34,679 227,003 -- 229,845
---------- ---------- ----------- ----------
Average number of common and
common equivalent shares outstanding ............... 9,010,991 9,158,239 7,686,019 9,159,485
========== ========== =========== ==========
Net Income (Loss) ...................................... $ 71,015 $1,167,742 $ (417,022) $2,051,272
========== ========== =========== ==========
Net Income (Loss) per Share ............................ $ 0.01 $ 0.13 $ (0.05) $ 0.22
========== ========== =========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,048,230
<SECURITIES> 0
<RECEIVABLES> 2,004,349
<ALLOWANCES> 10,000
<INVENTORY> 2,579,868
<CURRENT-ASSETS> 7,725,483
<PP&E> 96,708,221
<DEPRECIATION> 7,553,340
<TOTAL-ASSETS> 97,982,898
<CURRENT-LIABILITIES> 5,992,159
<BONDS> 10,170,874
15,944,055
0
<COMMON> 38,434
<OTHER-SE> 62,152,410
<TOTAL-LIABILITY-AND-EQUITY> 97,982,898
<SALES> 16,995,343<F1>
<TOTAL-REVENUES> 16,995,343<F1>
<CGS> 12,726,380
<TOTAL-COSTS> 17,665,542
<OTHER-EXPENSES> (37,545)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,782
<INCOME-PRETAX> (638,436)
<INCOME-TAX> (221,414)
<INCOME-CONTINUING> (417,022)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (417,022)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
<FN>
<F1>Sales and Total Revenues are net of Federal and State Excise Taxes
</FN>
</TABLE>
